Offshore tax havens hold trillions of dollars in assets and allow wealthy Americans to avoid paying $40 billion to $70 billion in taxes each year, a Senate panel said in a report being released Tuesday.
The investigative subcommittee of the Senate Homeland Security and Governmental Affairs Committee came to that conclusion after delving for more than a year into offshore tax evasion.
In one tax shelter, detailed in the investigators' lengthy report, $2 billion in capital gains were sheltered from taxation in an arrangement known as POINT, or Personally Optimized Investment Transaction, which took advantage of offshore secrecy.
Its promoters created the tax shelter by making billions of dollars in securities transactions to generate billions of dollars in capital losses, but the transactions were all fake, the investigators concluded.
They were nonetheless used by investors to offset their capital gains and erase taxes owed, and the government lost $300 million, the panel said. Promoters of the scheme told the investigators that the transactions were valid under U.S. tax laws.
The committee's report, prepared for a Tuesday hearing, describes offshore tax havens as a "black box" that allows wealthy Americans to hide money from taxation, regulation and law enforcement. They hide the money with the backing of "an armada of professionals," the report found.
In some cases, the arrangements take the form of a trust or corporation that makes it appear that money sent offshore is no longer in the user's control. Stashing money overseas can run afoul of tax laws when the money continues to be controlled or spent by the person funneling money into the trust or corporation.
To address the problem, tax, securities and money laundering laws should be changed to presume that a U.S. citizen should be taxed on money in a trust or corporation in a country known to the Treasury Department to be a tax haven, said Sen. Carl Levin of Michigan, the top Democrat on the investigative subcommittee.
That would put the burden on the taxpayer to prove the money should not be taxed.
"We've got to end the tax haven abuses. We've got to take some major legislative steps," Levin said in an interview. "I believe these schemes will not be found to be legal."
"Using offshore jurisdictions to shelter income is unfair, and I intend to fix this problem," said Sen. Norm Coleman, R-Minn., the subcommittee chairman.
The arrangement typically starts with a promoter, someone who sells wealthy people on the advantages of moving money offshore and who recommends a country or service provider to those clients.
In the offshore location, local providers help people set up offshore corporations and trusts that receive the money moved out of the United States. They fill out paperwork, pay appropriate fees and do business on behalf of the client. The corporations and trusts they create become the new owners of money and assets that the client moves offshore.
Often, the service providers manage the trusts and corporations for a fee. They also hold paperwork offshore, while allowing the clients to continue controlling their money and assets.
This wouldn't work, the report said, without lawyers who provide guidance to clients and financial institutions that allow access in the United States to money stashed overseas through credit and debit cards.
That's how the arrangements worked in several instances where the committee interviewed people who pleaded guilty to tax crimes related to offshore transactions, some of whom were caught in an IRS investigation into offshore tax evasion.
Investigators also looked extensively at overseas trusts and corporations used by entrepreneurs Sam and Charles Wyly to hold stock options and compensation, which the panel said remained under their control and untaxed.
Representatives for the Wylys told the panel that they exchanged those assets for an annuity agreement, and that tax was not owed until they received annuity payments under that agreement.
By Mary Dalrymple